Transcript

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Purdue extension
EC-736
Planning for the Unexpected:
Human Resource Risk and
Contingency Planning
Maria I. Marshall and Corinne Alexander
Department of Agricultural Economics
Small businesses are confronted by many different Writing a Contingency Plan
types of risk: production, marketing, financial, legal,
and human. Managers generally spend most of their A contingency plan is a set of procedures that defines
time dealing with production, marketing, financial, how a business will continue or recover its critical func-
and legal risks and give little consideration to human tions in the event of an unplanned disruption to normal
resource risk and how the absence of key personnel can activities. It allows you to assess your business opera-
affect their business. This is a serious oversight because tions and processes to determine how well the busi-
people are the key component in many risk manage- ness can function when key resources, such as critical
ment strategies. personnel, are not available.
Human resource risks are events that prevent employ- When writing your contingency plan you should use the
ees from fulfilling their responsibilities and thus keep knowledge and input of your business’s key employees
the business from operating at full efficiency. Human and outside stakeholders, such as your banker, accoun-
resource risks include but are not limited to: tant, insurance agent, and lawyer. You may also want to
include family members who are not currently involved
• Death in the business but may have a future interest. You
• Disability (temporary or permanent) should establish a planning team in order to share the
• Divorce responsibility among key personnel. This is important
because key employees and other team members will
• Management Error/Incompetence
be a critical part of any recovery strategy that you put
• Unexpected Temporary Leave together. An added advantage of including employees in
• Poor Employee Management Practices your planning team is to reassure employees that their
• Employee Turnover jobs are secure even as you are preparing and imple-
menting the plan.
One way that you can combat human resource risk is
by writing a contingency plan. A contingency plan is a A contingency plan consists of six main sections:
structured way of deciding what to do if key operations • Executive Summary
are disrupted or key personnel are not available. It can
help you identify and prevent or modify the impact of • Risk Management Goals
unacceptable risks. It helps you recognize the best pos- • Risk Assessment
sible options and ensures that your risk management • Business Impact Analysis
dollars are spent wisely.
• Risk Management Strategies
• Plan Maintenance

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Writing a contingency plan is a continuous process. For each event, evaluate both the probability of occur-
Once you decide which risk management strategies rence and the consequence or impact of occurrence on
make sense for your business, you may need to re-assess a scale of 1 to 10, where 1 is low and 10 is high. You can
the risks in your original plan. You should not be dis- think of the consequence of the event both in terms of
couraged if this causes you to rewrite several sections. severity and cost to the business. The first event in Table
This often leads to an even better understanding of your 1 is an owner of a business identifying as a possible risk
business and how everyone in it fits together. The execu- a car accident that prevents or her from fulfilling her
tive summary is the first section of your contingency normal duties for six weeks. The owner rates the prob-
plan. However, it is the last section you should write and ability of a car accident at between 2 and 3. She rates the
so is discussed at the end of this publication. consequence of being unable to fulfill her duties for six
weeks at 8. Use Worksheet 1 to list the events that pose a
Risk Management Goals threat to your business.
In this section, you should identify your risk manage-
ment goals. The purpose of risk management goals is
Figure 1. The Risk Matrix
to reduce uncertainty. For example, you may want to
reduce employee absence or accidents, which reduces
uncertainty about labor availability. Risk management
goals can also be about managing business opportuni-
ties. For example, you may want the business or farm to
stay within the family, which reduces uncertainty about
the continuation of the business. Risk management
goals help you decide which opportunities and risk
management strategies to pursue.
Risk Assessment
This section of the contingency plan is about identify-
ing and assessing the risks to the business. You should
pinpoint the events that could cause financial or opera-
tional harm to the business.
Table 1. Risk Assessment List:
What Risks Does Your Enterprise Face?
Rate the probability and consequence (severity, cost)
Once you have rated the probability and consequences
of each event on a 1-10 scale (1=Low, 10=High). of each event, you can place them all on the risk matrix
as shown in Figure 1. In event 2, the owner passes away;
Event Probability Consequence he is 80 years old and did not write a succession plan.
1. Owner in car accident, The owner rates the probability very high at 8 and the
out 6 weeks. . . . . . . . . . . . . . . 2-3 . . . . . . . . . . 8 consequence also very high at 8. Event 2 demonstrates
the importance of succession planning. If the 80-year-
2. Owner, 80, passes away . . . . 8 . . . . . . . . . . . 8 old business owner had a succession plan, the conse-
3. Owner, 35, passes away . . . . 1 . . . . . . . . . . . 10 quences to the business would be reduced to around
2. Introducing a succession plan moves the location of
4. New employee quits . . . . . . . 3 . . . . . . . . . . . 3 event 2 on the risk matrix from high consequence to low
5. Employee injured on consequence, as shown by the arrow. Part of successful
farm equipment . . . . . . . . . . . 5 . . . . . . . . . . . 5 contingency planning is to identify areas in which risk
management, such as succession planning, is needed.
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In event 3, a young owner (35 years old) passes away. • What are the consequences or impacts on the
The owner rates the probability very low at 1, but business (operating, financial, and legal) if that
believes the consequences for the business will be dev- function is not completed?
astating at 10. Event 4 identifies the probability of a new • How long can that function remain deficient?
employee quitting at 3 and consequences also low at 3.
When you think about the recovery timeframe, you
In event 5, an employee is injured on farm equipment,
should try to determine whether that particular func-
which is a common occurrence, and the consequences
tion has to be covered immediately in order to keep
vary greatly, so the owner rates both the probability and
the business going or if it can be part of a long-term
consequences at 5.
recovery strategy.
You should answer two main questions in this section of
the contingency plan: Risk Management Strategies
1. What are the events that could harm my busi- Now that you have identified the risks to the business,
ness or reduce my ability to accomplish my risk their probability, and their consequences, you should
management goals? prioritize and begin to establish management strate-
2. On a scale of 1 to 10, how likely is it that the event gies for those risks. As a small business owner, you can
will occur? decide to retain, reduce, avoid, or transfer the risks you
detailed in the risk assessment section. The risk matrix
Business Impact Analysis can then guide your choice of risk management strategy.
Depending on where the event lies on the risk matrix in
You can assess the impact of an event on a business
Figure 2, there are four corresponding risk management
in three ways: operating impact, financial impact, and
strategies depicted. Use Worksheet 2 to locate the events
legal impact. Operating impact is loss of operating ef-
you identified in Worksheet 1 on the risk matrix. This
ficiency, such as decrease of sales or production volume
will help you choose your risk management strategy.
due to the absence of key employees. It can be as simple
as not having someone to answer the phone. Loss of
customers, increased costs, and cash flow problems are
examples of financial impact. Legal impact involves Figure 2. The Risk Matrix Guides the Choice of
Risk Management Strategy
the inability to fulfill business contracts with suppliers,
customers, or vendors. In many ways, these impacts are
interrelated. For example, hiring inexperienced tempo-
rary personnel to cover the day-to-day duties of an in-
jured business owner might lead to decreased operating
efficiency and cash flow problems, which might mean
the business cannot pay its vendors, thereby causing a
decrease in the business’s credit rating and a lawsuit.
This section also includes identifying critical functions
within the business and how the loss of key personnel
will affect those functions. You should ask yourself the
following questions:
• What are the critical functions performed by each
individual?
• How will the event (loss of key personnel) affect
that function?
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With a risk avoidance strategy, the business takes action It should also include the procedures to be followed if
to avoid the risk. Typically, this means the business that event should occur. The main questions to be an-
chooses not to undertake an activity. For example, a swered in this section are:
farmer may decide not to grow strawberries because
• What are the resources required to continue to
she does not have enough reliable labor to pick the
perform critical functions?
strawberries. Event 2 falls into the avoid category; the
business owner could avoid the severe negative conse- • How can the business decrease the likelihood of
quences to the business with a succession plan. an event occurring?
• How can the business lessen the impact of an
A risk reduction strategy requires you to take action to
event?
reduce either the probability or consequence of the risk
or both. Typical examples include worker safety train- Executive Summary
ing and safety equipment, both of which are appropri-
ate measures to address event 5. In the case of event 2, The executive summary in its basic form should tell the
the business owner can invest the time and money to reader who is involved in the plan and what events are
develop a succession plan or will. considered. It should also summarize the risk manage-
ment strategies used in the plan. The executive sum-
Unanticipated events will inevitably occur, and, when mary is the last thing you write but the first section of
you choose to retain those risks that are of low conse- the contingency plan.
quence to the business, you are choosing a risk retention
strategy. Businesses face many small risks, such as a Plan Maintenance
new employee quitting or a customer’s bounced check,
It is important that you keep the contingency plan up to
and these events are seen as the cost of doing business.
date and revise it at least once a year. The plan should
You can invest time or money to protect the business
reflect any changes in the business. You should identify
when these events occur. A rainy day fund is a common
ways to keep the plan fresh and relevant.
risk retention strategy, saving money when the business
is doing well to be able to minimize the impact of
customer’s bounced checks and the like. Next Steps
A risk transfer strategy requires that you transfer the Use Worksheets 1 and 2 to list your human resource
risk to a third party, such as an insurance company. risks and identify your risk management strategies.
The insurance company will pay an indemnity when Then write your contingency plan. Besides human
the event occurs. Typical insurance options for farmers resource risk, you can use a contingency plan to identify
include crop insurance or revenue insurance. Liability risk management strategies associated with production,
insurance, disability insurance, key personnel insur- marketing, financial, and legal risks.
ance, and life insurance are types of insurance that Remember that writing a contingency plan is a continu-
small businesses should investigate. In event 1, the busi- ous and evolving process. It can be time consuming
ness will be better off if the owner has car insurance but it is the best process to assess the efficiency of your
and disability insurance. In event 3, the business may business operations and how well your business can
survive if the owner’s life insurance provides sufficient recover from serious disruptions.
cash to allow the spouse or partners to learn how to
fulfill the owner’s duties. Acknowledgements
Each strategy should include the roles and responsibilities We would like to thank the North Central Risk Manage-
of everyone involved in the recovery stages of an event. ment Education Center for their support.
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Worksheet 2. Risk Assessment Matrix
Locate the events you identified in Worksheet 1 on the risk matrix. This will help
you choose your risk management strategy.
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Notes
Visit the Purdue New Ventures Team Web site
http://www.agecon.purdue.edu/newventures
for more information on the topics discussed in this publication and for other resources
to help you decide whether to start a new agriculture- or food-related business.
New 10/05
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